High-street and online apparel seller Next (NXT) brought shareholders some New Year cheer with the news that total full-price sales were up nearly 5% over the three months to the end of December rather than down 2% as previously predicted.

Interestingly, it was in-store sales which drove the increase, with the retail estate growing revenue by 12.5% against just a 0.2% rise in online revenue, albeit against a strong comparative period in 2021.

Despite anecdotal talk of shoppers having brought forward their seasonal spending, Next said it saw a ‘dramatic boost’ from the start of December with sales peaking the week before Christmas up 17% on the previous year.

This momentum continued into the post-Christmas sale period driven by cold weather, which drove demand for winter clothing such as jumpers, scarves and gloves.

Broadly speaking, clothing sales seem to have held up better this year than non-food spending in general and certainly much better than spending on household goods, electrical appliances, sports equipment, toys and even watches and jewellery according to data released by the Office for National Statistics.

All of which bodes well for other apparel retail firms which are due to report their results, especially those with physical shops such as Frasers (FRAS) and Marks & Spencer (MKS).

However, we are concerned that Next itself guided analysts to expect lower earnings for the year to January 2024 and we find ourselves wondering about the firm’s real underlying earnings growth potential.

From the early 1990s until around 2017, we conservatively estimate the company grew its earnings per share at a 15% compound annual growth rate, meaning profits essentially doubled every five years.

Knowing this, when times were good investors were happy to pay up to 35 times cyclically adjusted earnings and even 45 times on occasion.

In early 2017, the firm warned of a ‘bleak’ outlook and 12-month earnings subsequently flatlined at around 440p per share for two and a half years to the middle of 2019.

This was a watershed moment, as investors realised Next was no longer a double-digit growth stock, and since 2017 the shares have struggled to rerate above 15 times trend earnings.

Although 12-month earnings per share have rebounded from their 2020 low of 238p to 542p today, they are forecast to remain around this level for the next two years meaning the old trend growth rate is well and truly broken.

In that scenario, maybe the best shareholders can hope for is not a rerating but a generous stream of cash which they can reinvest in the next big growth story?

‹ Previous2023-01-12Next ›